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Illiquid stocks usually have bigger ticks than more fluid stocks, but generate larger gains with less volume. Less volume means that it takes less to push a stock up than it does to push a heavily traded stock. Trading illiquid stocks can help improve your trading and make a trader more knowledgeable on the effects of volume. Illiquid stocks can help investors reach trading goals much faster as each movement is much larger than the movements in high volume stocks.

How to Generate Profits

Proven strategies for profiting from illiquid stocks are gap strategies. Low volume stocks are much more prone to gapping, and thus, strategies for gapping up and strategies for gapping down are much more effective in trading these stocks. Technical analysis can be more difficult to apply to low volume stocks, but is much more profitable on moves than high volume. Technical analysis indicators are choppier and less fluid than on high volume securities.

Less Data More Decisions

If you’ve ever taken a look at a stock chart of a low volume stock, you’ll see that technical analysis doesn’t apply as well. Moving averages can be as volatile as the price itself, and momentum indicators are less accurate. Custom indicators with longer data timeframes and special weighting can help smooth out the ups and downs and give a better picture of future direction.

Back to the Basics

The basic trading fundamentals, such as earnings reports and price to earnings ratios, are much easier to comprehend and apply to these stocks than technical analysis. Fundamentals work over the long term much better, as they show real value of a company rather than the day to day trading range. While not completely custom indicators, a long term PE reference will help you determine if the stock is oversold or overbought much better than the technical analysis counterpart, the RSI.

Lower Volume Can Be Better

Low volume stocks need less attention than the ever changing favorites like the QQQQ or common ETFs. The price action of penny stocks, low volume stocks, and other illiquid investments is much more contained and infrequent, allowing a trader time off in between trades. Proven strategies like earnings reports and fundamental analysis works well on the lower volume stock, and for long-term investors, the most illiquid stocks are the best.

Leroy Rushing is an active, professional day trader; trading coach; and author. He is the Founder and CEO of Trading EveryDay, a distinguished provider of educational trading products and services that are available worldwide. Trading EveryDay also has many articles with unique perspectives on day trading.

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